MBA 710 Applied Economic Analysis

1. MBA 710Applied Economic Analysis • Instructor: Bernard Malamud • Office: BEH 502 Phone (702) 895 –3294 Fax: 895 – 1354 • Email: malamud@ccmail.nevada.edu Website: www.unlv.edu/faculty/bmalamud Office hours: TR 11:30 – 12:30; 2:30 – 3:30 pm And by appointment

2. Economics for Strategic Thinking You and your adversaries/partners • Your customers, suppliers, competitors, colleagues • Anticipate what they’ll do • Figure they’re as smart as you are

3. Tools of economic analysis • Build simple, tractable models of complex situations … Capture the essence • Assume purposeful behavior • Maximize profit … subject to constraints • Anticipate outcomes … what happens when everyone does their best • Evaluate outcomes • Seek improvements The Mantra: Marginal Benefits = Marginal Costs

4. Buyer Demand Price Income Tastes Other Prices Substitutes Complements Expectations Seller Supply Price Costs Input prices Wages, rents, ... Supplies Technology Expectations Demand and Supply

5. GM’s Story • Gotta give rebates to old-truck owners = X • Coupon can be resold to others (for Q) • They get smaller rebate = x • There’s also a brokerage fee = k • Demand: 2.0 million trucks @ $20K • 0.6 million old-truck owners • 1.4 million other buyers Price elasticity of demand = 4

6. GM’s Story, continued • Price elasticity of demand = 4 • For each 1% increase in price above $20K there’s a 4% decrease in quantity demanded below 2.0 million • If price rises by 1% to $20.2K, sales drop by 80,000 (4% of 2 million) to 1.92 million • This is highly elastic demand • ↑P Q↓↓ … Total Revenue = TR ↓ • ↓P Q↑↑ … Total Revenue = TR ↑

7. GM’s Story, continued • Cost of truck to GM = $15K Marginal Cost = $15K … doesn’t change • GM wants to maximize profit Profit = Total Revenue – Total Cost It should produce to point where MARGINAL REVENUE = MARGINAL COST Note: If GM wants to sell another truck, it has to drop its price a bit on all those it’s already selling MR < Price